401(k) withdrawal rules
Last updated August 2026
Short answer
A 401(k) is deliberately hard to raid. The rules exist to keep retirement money in place, and they are strict enough that the cost of an early withdrawal is usually much larger than people expect once the tax, the penalty and the lost compounding are added together.
The default: 59 and a half
At 59 and a half, withdrawals from a traditional 401(k) are taxed as ordinary income and nothing more. From a Roth 401(k), qualified withdrawals are tax free provided the account has met its five-year requirement.
Before that age, a traditional withdrawal costs income tax plus a 10% penalty. On a $20,000 withdrawal for someone in the 24% bracket, that is roughly $4,800 in tax and $2,000 in penalty, leaving about $13,200 from a $20,000 balance.
Note that many plans simply do not permit withdrawals while you still work there, outside of a hardship or a loan. The tax rules set the ceiling; your plan document sets what is actually available.
The rule of 55, and the mistake that destroys it
Leave your job in or after the calendar year you turn 55 and you can withdraw from that employer's plan without the 10% penalty. Income tax still applies. For public safety workers the age is 50.
The limitation is precise and expensive to miss: it applies only to the plan of the employer you have just left. It does not apply to plans from earlier jobs, and it does not apply to IRAs.
So the common advice to roll every old 401(k) into an IRA is wrong for someone in this position. Rolling that final balance into an IRA converts penalty-free access at 55 into a 10% penalty until 59 and a half.
Other exceptions to the 10% penalty
Total and permanent disability.
Death, where the balance passes to beneficiaries.
A qualified domestic relations order dividing the account in a divorce.
Unreimbursed medical expenses above a percentage of adjusted gross income.
Substantially equal periodic payments, a fixed schedule that must continue for five years or until 59 and a half, whichever is longer.
Birth or adoption, and certain federally declared disasters, up to set limits.
Every one of these waives the penalty only. Income tax on a traditional balance still applies.
Loans and hardship withdrawals are different things
A 401(k) loan, if your plan allows one, lets you borrow up to the lesser of $50,000 or half your vested balance and repay yourself with interest. No tax, no penalty, provided you repay on schedule. The risk is leaving your job with a balance outstanding, which can turn the remainder into a taxable distribution.
A hardship withdrawal is not a loan and is not repaid. It requires an immediate and heavy financial need, and while it is permitted it is still taxed and usually still penalized.
Required minimum distributions
From age 73 the IRS requires you to withdraw a calculated minimum each year, based on your balance and life expectancy. The first one can be deferred to April 1 of the following year, but doing so stacks two distributions into one tax year.
Roth 401(k)s no longer require distributions during the owner's lifetime, which removed one of the last reasons to roll a Roth 401(k) into a Roth IRA. Failing to take an RMD carries a penalty on the shortfall.
Try it in Walnut
Walnut reads the holdings in your connected brokerage accounts, so when you are planning which account to draw from you can see what you actually own outside the plan.
Why cashing out at a job change is so costly
It is the most common early withdrawal, and it happens because the balance feels small. A $30,000 balance cashed out at 30 might net around $20,000 after 20% withholding, the rest of the income tax and the penalty.
The larger loss is invisible. That $30,000 left invested for thirty more years at a historically ordinary return would be worth several times the amount withdrawn. Rolling it into an IRA or the new employer's plan takes an afternoon and keeps all of it.
Sources
Penalty exceptions and RMD rules are in the IRS guidance on exceptions to tax on early distributions and the IRS RMD FAQs. Your plan document controls what withdrawals are actually available to you. Walnut is informational and is not an investment adviser. This guide is educational and not personalized tax or investment advice; anything with a tax consequence is worth confirming with a tax professional.
FAQ
When can I withdraw from my 401(k) without a penalty?
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Generally from age 59 and a half. Before that, withdrawals are taxed as income and carry an additional 10% penalty unless an exception applies. The most useful exception for people changing jobs late in their career is the rule of 55, which allows penalty-free withdrawals from the plan of the employer you just left.
What is the rule of 55?
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If you leave your job in or after the calendar year you turn 55, you can take penalty-free withdrawals from that employer's 401(k). It applies only to the plan you just left, not to older plans or IRAs, which is a strong reason not to roll that balance into an IRA if you might need it before 59 and a half.
What happens if I cash out my 401(k) when I leave a job?
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You owe income tax on the whole amount plus a 10% penalty if you are under 59 and a half, and the plan withholds 20% up front. A $30,000 balance can easily net around $20,000. You also permanently lose the compounding, which is usually the larger cost.
Do I have to start taking money out of my 401(k)?
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Yes. Required minimum distributions begin at age 73 for most people and force a calculated amount out each year whether you need it or not. Roth 401(k)s are no longer subject to RMDs during the owner's lifetime. Missing an RMD carries a penalty on the amount you failed to take.